RBI’s assurance on liquidity, bond buyback calm markets.
The interest rates on short-term money market instruments -– commercial paper and certificate of deposits -– eased for the second day in a row on Reserve Bank of India’s signals it will ease the intense pressure on liquidity.
Dealers said despite yesterday’s 25-basis-point increase in key policy rates, those for CPs-CDs had declined up to 25-30 bps. Statements by RBI officials and the proposed buyback to infuse resources have partially addressed concerns.
There were legitimate concerns that the deficit (of liquid resources in the market) was significantly in excess of RBI’s comfort zone, the central bank had said. Though a liquidity deficit was consistent with an anti-inflation stance, an excess can be disruptive to both financial markets and credit growth in the banking system, it had said in yesterday’s second quarter review.
Trend reverses
Anahaita Shah, director with NVS Brokerage Ltd, a finance firm engaged in placement of short-term papers, said there was a reversal in the rate trend (rates turning soft). Three-month CPs were placed in the 7.70-7.95 per cent (annual coupon) band yesterday. Now, the rate is 7.60-7.75 per cent. For this week, rates may remain subdued, since RBI is holding an auction tomorrow to buy back government bonds worth Rs 12,000 crore to infuse liquidity. From next week, the rates would be determined by the quantity of government borrowings (Centre and state) and the pace of expenditure, as the Centre’s balance with RBI is a little over Rs 25,000 crore
In the second quarter, both CP and CD markets witnessed higher issuances, as lenders (through CDs) and borrowers (through CPs) scouted for cheaper funds. It was against the backdrop of a sustained increase in policy rates, the central bank said.
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The average fortnightly issuance of CDs remained higher during the quarter as compared to the previous quarter. The higher issuance reflects banks’ efforts to raise bulk deposits at lower cost, as deposit interest rates started moving northward. In line with the movement of rates in other money market segments, the weighted average discount rate of CDs increased.
The average fortnightly issuance of CPs also remained higher during the second quarter, as compared with the previous quarter.
Leasing and finance companies and manufacturing ones were major issuers of CPs. The higher issuance suggests efforts by the commercial sector to raise resources from alternative sources of finance in the face of tight liquidity conditions.